Classes Of Shares In Australia Explained

Thinking about issuing shares in your company, bringing on a co-founder, or raising capital? One of the most powerful tools you can use is setting up more than one class of shares.

Different classes let you separate ownership from control, reward key people without handing over the reins, and tailor dividends to suit your growth plan. Done well, share classes can keep everyone aligned and reduce disputes as you scale.

In this guide, we’ll walk through what a class of shares is, the most common classes used by small companies in Australia, when and why you might use them, and the legal steps to put them in place properly.

What Does “Class Of Shares” Mean?

A “class of shares” is a category of shares that all carry the same set of rights. Those rights usually relate to three things: voting, dividends, and what happens on an exit (such as a sale or liquidation).

For example, one class might carry full voting rights and ordinary dividends. Another class might be non-voting but have a fixed dividend. A third class might convert to ordinary shares only if performance milestones are hit.

Under Australian law, companies can issue different classes if their governing rules allow it. Typically, this is specified in your Company Constitution. If your constitution doesn’t allow multiple classes yet, you can usually amend it by shareholder approval before issuing new classes.

If you’re mapping out equity for the first time, it’s worth reading about how to allocate shares in a startup-even if you’re not a “startup” in the tech sense, the same equity planning concepts apply.

Why Create Different Share Classes In A Small Company?

Not every small business needs multiple classes. But when they’re used intentionally, they solve common problems for founders, investors, and key staff. Here are typical goals.

• Keep Control While Sharing Ownership: You might want to retain voting control but share equity upside with team members or early supporters. Non-voting or limited-voting shares can make this possible.
• Attract Investors With Tailored Rights: Early investors sometimes want priority dividends or a return of capital before founders get paid. A preference class can address this without changing founder rights.
• Align Rewards To Performance: Performance or milestone-based shares can convert into ordinary shares only when agreed targets are met, which helps align incentives.
• Plan For Future Raises: Having the option to issue a new class later can streamline future fundraising without re-cutting everyone’s rights.
• Simplify Decision-Making: Separating voting rights from pure economic participation can reduce deadlocks, especially in closely held companies.

The key is to be very clear about the rights attached to each class and document them consistently across your constitution, offer documents and any investor or founder agreements.

Common Share Classes In Australia

Your company can label classes in any sensible way (for example: Ordinary shares, A Shares, B Shares, etc.). What matters is the package of rights attached. These are the most common approaches we see with small businesses.

Ordinary Shares

Ordinary shares are the default class for most proprietary companies. They usually carry full voting rights, participate in dividends at the directors’ discretion, and share in proceeds on an exit after debts are paid.

If you only have one class of shares in your company, they’re almost certainly ordinary shares.

Preference Shares

Preference shares give their holders some priority over ordinary shareholders-typically priority dividends and/or preferential return of capital on a sale or liquidation. They can be cumulative (unpaid dividends accrue) or non‑cumulative, and they may be redeemable or convertible into ordinary shares later.

Because they’re flexible, preference shares are common in early rounds with sophisticated investors. They can also be useful in family businesses where one branch wants more predictable income. You can dive deeper into how they work in this overview of preference shares.

Non‑Voting (Or Limited Voting) Shares

Non‑voting shares participate in dividends and exits but don’t carry a vote at general meetings (or only in limited circumstances, such as if dividends are in arrears). Non‑voting classes are often used to reward employees or family members without shifting control.

Redeemable Shares

Redeemable shares can be bought back (redeemed) by the company or the holder under specified conditions and at a set price or formula. They’re sometimes used to tidy up cap tables after a loan-like injection of capital, or to manage founder succession in family companies.

Founder/Management Shares

Sometimes founders issue themselves a class that includes vesting (shares are issued but subject to buy-back if the founder leaves early) or extra voting power. Rather than creating a special founder class, many teams choose to use vesting terms over ordinary shares documented in a Share Vesting Agreement.

Performance Or Milestone Shares

Performance shares convert into ordinary shares if specified milestones are achieved (for example, revenue, profit or expansion targets). These are helpful when you want to incentivise a manager or adviser but still protect the company if goals aren’t met.

If you want a quick comparison of these options, Sprintlaw’s primer on different classes of shares covers key pros and cons.

How To Set Up Share Classes In Your Company (Step‑By‑Step)

Here’s a simple, practical sequence to follow if you’re introducing or refining multiple classes of shares in an Australian proprietary company.

1) Map Your Commercial Goals And Cap Table

Start with your end goals. What control do you want to keep? What economic outcomes are you promising investors or team members? Sketch scenarios (profits, a sale, a founder exit) and check who gets what under each scenario.

At the same time, think about the total number of shares you’ll need now and later. If you’re new to this, this guide to how many shares a company can have can help you decide on an initial share pool.

2) Decide The Rights For Each Class

For each class you intend to issue, specify the rights clearly. At a minimum, cover:

• Voting: Full, limited, or none (and any special votes on certain matters).
• Dividends: How they’re calculated (fixed, preferential, discretionary) and whether they’re cumulative.
• Exit/Liquidation: Priority of return and whether there’s a cap or participation with ordinary shares after preferences are paid.
• Conversion/Redemption: When and how shares convert to ordinary or can be redeemed.
• Transfer Restrictions: Pre‑emption rights (first refusal), drag/tag rights, and board consent requirements.

Clarity here reduces conflict later. Don’t rely on vague expectations-write the rights down in plain language and make sure they’re consistent across all documents.

3) Check Your Governing Rules (Or Update Them)

Confirm your Company Constitution allows for multiple classes and sets out how to create or vary class rights. If it doesn’t, update it before issuing new classes. A well‑drafted Company Constitution should outline the mechanics for issuing new classes, calling meetings of a class, and approving variations to class rights.

4) Paper The Deal With The Right Contracts

When you issue new shares, you’ll usually formalise the offer and acceptance via a Share Subscription Agreement. If you’re bringing on a co‑founder or investor, also document governance and decision‑making rules in a Shareholders Agreement (including pre‑emption, drag/tag, and how class rights interact with shareholder consent matters).

If you’re using vesting (common for founders and key staff), use a Share Vesting Agreement that aligns with the class rights and your constitution.

5) Approvals And Filings

Follow your constitution’s process for issuing new shares and, if applicable, creating a new class or varying class rights. This usually involves director resolutions and, sometimes, special resolutions of shareholders (including the affected class).

Keep your company register up to date and lodge required changes with ASIC within the relevant timeframes. If shares change hands later, you’ll be dealing with off‑market share transfers and ASIC notifications, so set up good record‑keeping now.

6) Keep Your Documents In Sync

Finally, make sure your constitution, any Shareholders Agreement, subscription documents and cap table all say the same thing. Inconsistencies are a common source of disputes-particularly during funding rounds or a sale.

How Do Share Classes Affect Voting, Dividends And Exits?

The real power of share classes shows up in three areas. Here’s how to think about each one as a small business owner.

Voting And Control

Voting rights determine who can appoint directors, approve major transactions, or change the company’s rules. If maintaining control is crucial, keep voting concentrated with founders or a specific class, and use non‑voting or limited‑voting shares for others.

Be careful with “golden” votes or special veto rights-investors can perceive them as red flags if they’re too one‑sided. Balance founder control with investor protections (like board seats or specific consent rights in your Shareholders Agreement).

Dividends And Cash Flow

Dividends for ordinary shares are usually at the directors’ discretion, subject to the company having sufficient profits and meeting the Corporations Act’s solvency test.

Preference shares may have a fixed dividend rate and priority. If cash flow is tight, cumulative preferences can build a backlog that must be paid before ordinary dividends resume-great for investors but a constraint on reinvestment. Model a few scenarios so you understand the impact over time.

Exits And Liquidation Preferences

On a sale or winding up, preference shares might receive their capital back first (sometimes with a multiple) and then share “pro rata” with ordinary shares, or they may be capped at their preference return. These details can significantly change who gets what-and whether a borderline deal works for all parties.

If you’re weighing which structure suits your next round, comparing ordinary and preference outcomes side‑by‑side is helpful. When in doubt, get the terms summarised in a simple table before you draft anything.

Transfers, Leavers And Buy‑Backs

Most proprietary companies restrict share transfers to keep the register tight. Combine pre‑emption rights (existing shareholders get first refusal) with leaver provisions (what happens if a founder or employee leaves) to avoid stalemates.

If shares do change hands, you’ll need to follow the right process for the transfer and ASIC updates. For a refresher, see the compliance steps around ASIC transfer of shares.

Essential Documents When You Use Multiple Share Classes

Setting up the legal “plumbing” around your classes of shares protects your business and makes future deals smoother. The exact suite depends on your plan, but most small companies will consider the following.

• Company Constitution: Sets out your company’s internal rules, including your ability to create classes, issue shares, call class meetings and vary class rights.
• Shareholders Agreement: Governs decision‑making, transfers, pre‑emption, drag/tag rights and dispute resolution. It should dovetail with your class rights.
• Share Subscription Agreement: Records the offer, subscription price and specific rights for new shares issued to investors or co‑founders.
• Share Vesting Agreement: If using vesting for founders or staff, this agreement sets milestones and what happens if a person leaves early.
• Board And Shareholder Resolutions: Formal approvals to create new classes, vary rights and issue shares, consistent with your constitution and the Corporations Act.
• Cap Table And Share Certificates: Keep your cap table accurate and issue certificates that reflect the correct class and number.
• Policy On Dividends And Buy‑Backs: A simple internal policy or recurring board practice helps you apply dividend priorities and any redemption rules consistently.

If you’re considering a bespoke class (for example, redeemable, performance, or non‑voting), check that your constitution can accommodate it and that the economics line up with your longer‑term plans. In some cases, simpler is better-many small companies can achieve their goals with ordinary shares plus vesting, rather than a complex multi‑class stack.

Practical Tips And Common Pitfalls To Avoid

Before you lock in your share class structure, keep these practical points in mind.

• Start With Simplicity: Only add a new class if you need a right you can’t achieve through your Shareholders Agreement or vesting. Fewer moving parts means fewer surprises later.
• Model The Economics: Put numbers on your dividend priorities and liquidation preferences. A quick spreadsheet can reveal unintended outcomes (like founders getting nothing in a modest exit).
• Align Documents And Processes: Your constitution, Shareholders Agreement and subscription terms must all tell the same story. If they don’t, expect confusion during due diligence or a sale.
• Be Clear With People: If you issue non‑voting or performance‑based shares, make sure recipients understand the differences from ordinary shares. Clear expectations defuse disputes.
• Plan For Future Rounds: Leave room for future investors by anticipating whether you’ll need another class later. It’s easier to build in the flexibility now.
• Document Transfers Properly: When shares move between people, use the right transfer forms and keep ASIC notified-this goes hand‑in‑hand with off‑market share transfers.

If you’re currently a single‑class company and want to introduce a new class, you may need class member approval to vary existing rights. The process matters-get advice early so you don’t have to redo resolutions or filings.

Key Takeaways

• A class of shares is a set of shares with the same rights around voting, dividends, and exit-use classes to align control and economics with your growth plan.
• Common classes include ordinary, preference, non‑voting, redeemable and performance shares; each serves a different purpose in small companies.
• Define the rights for each class clearly, then reflect them consistently in your Company Constitution, Shareholders Agreement and subscription documents.
• Follow the right approvals and ASIC processes when creating or varying class rights, issuing shares and recording transfers.
• Start simple, model outcomes, and plan ahead so your share structure supports future raises and potential exits.

If you’d like a consultation on setting up the right class of shares for your company, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.